If you go with an ARM you should understand the max cap and the max movement per year. If you are planning on moving in 5 years it may make sense. Our first townhome we did an ARM (2009) as we planned on moving in 5 years (Moved in 2013) and I knew the rates were going to stay low as we were still sliding down when we closed.
Fast forward to this summer, had an opportunity to "arm up" again with our new house or go fixed 30 year. Ended up locking a 3.75 (rates jumped up .5 the week before closing
) fixed 30 year. Why? The Fed can't keep it this low forever, eventually the rates will equalize to be where they should be to support this type of economy, my guess 6-8% or more.
Money is cheap right now, lock in with what you can. I bet 5 years from now we won't be anywhere near this rate for car loans, home loans, etc.
Unless you can get a movement guarantee of closer to 1% with a ceiling of probably 5-6%, I wouldn't do it in this current economic environment.
If you have a drop of $300 a month, and you said $4000 in closing costs, your break even is 13 months, so its not a bad move. I would personally lock a little higher, say 4% fixed 30 year, swallow a $200 a month profit and break even in 20 months as you said you are moving in around 5 years (not 2 years).
**rough calculations, not going into an amort table this late in the night.